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Sundaram Enterprises purchased a machine for Rs 2,00,000 on credit from Vishal Machines and paid Rs 10,000 in cash as installation charges. The journal entry for these transactions will be:

Machinery A/c is debited Rs 2,10,000, with credits of Rs 2,00,000 to Vishal Machines and Rs 10,000 to Cash. Installation cost is a necessary expense of bringing the machine into use, so it is capitalised as part of the asset's cost, not expensed.

  1. AMachinery A/c Dr. 2,10,000 To Vishal Machines 2,00,000 To Cash A/c 10,000Correct
  2. BMachinery A/c Dr. 2,00,000 Installation Expenses A/c Dr. 10,000 To Vishal Machines 2,00,000 To Cash A/c 10,000
  3. CPurchases A/c Dr. 2,00,000 Machinery A/c Dr. 10,000 To Vishal Machines 2,00,000 To Cash A/c 10,000
  4. DMachinery A/c Dr. 2,00,000 To Vishal Machines 2,00,000 and Installation Expenses A/c Dr. 10,000 To Cash A/c 10,000, with both charged to profit

Explanation

Installation charges are necessary to bring the asset into working condition, so they are capitalised: Machinery = 2,00,000 + 10,000 = 2,10,000. This is a compound entry crediting the supplier 2,00,000 and cash 10,000. Option B treats installation as an expense, which is wrong, and option C debits Purchases for a fixed asset.

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